Market or Sales Value Method--Allocation of Joint Cost:
Learning Objectives:
- Explain the market value method or
sales value method of joint cost allocation between products.
Market or sales value method enjoys great popularity
because of the argument that market value of any product is a manifestation
of the cost incurred in its production. The contention is that if one
product sells for more than another, it is because more cost was expended to
produce it. Therefore, the way to prorate the
joint cost is on the basis of
the respective market values of the items produced. The method is really a
weighted market value basis using the total market or sales value of each
unit (quantity sold times the unit sales price).
Example:
Joint products A, B, C and D are produced at a
total
joint
production cost of $120,000. Quantities produced are: A, 20,000
units; B, 15,000 units; C, 10,000 units; and D, 15,000 units. Product A
sells for $0.25; B, for $3; C, for $3.5; and D, for $5. These prices are
market or sales values for the products at the
split-off point; i.e., it is
assumed that they can be sold at a that point.
Management may have decided,
however, that it is more profitable to process certain products further
before they are sold. Nevertheless, this condition does not destroy the
usefulness of the sales value at the
split-off point for the allocation of
the
joint
production cost. The proration of this
joint cost is made in the
following manner:
| Joint Products |
No. of Units
Produced |
Market Value per
Unit |
Total Market Value |
Ratio of Product
Value to Total Market Value |
Apportionment of
the Joint Production Cost |
| A |
20,000 |
$0.25 |
$5,000 |
3.125% |
$3,750 |
| B |
15,000 |
$3.00 |
$45,000 |
28.125% |
33,750 |
| C |
10,000 |
$3.50 |
$35,000 |
21.875% |
26,250 |
| D |
15,000 |
$5.00 |
$75,000 |
46.875% |
56,250 |
| |
---------- |
|
--------- |
---------- |
--------- |
| Total |
60,000 |
|
$160,000 |
100.00% |
$120,000 |
| |
===== |
|
======= |
======= |
======= |
|
The same results can be obtained if the total
joint
production cost ($120,000) is divided by the total market value of the
four products ($160,000). The resulting 75 percent is the percentage of
joint cost in each individual market value. By multiplying each market value
by this percentage, the
joint
production cost will be apportioned as shown in the
percentage chart.
Proponents of the market value method or sales
value method stat that the
joint cost should be assigned to products in
accordance with their sales value because, were it not for such a cost, a
sales value would not exist. Under this method, each
Joint product yields
the same unit gross profit percentage, assuming that the units are sold
without further processing. This can is illustrated in the following
example:
| |
Total |
A |
B |
C |
D |
| Sales--Units |
52,000 |
18,000 |
12,000 |
8,000 |
14,000 |
| Ending inventory |
8,000 |
2,000 |
3,000 |
2,000 |
1,000 |
| Sales--Dollars |
$138,5000 |
$4,500 |
$36,000 |
$28,000 |
$70,000 |
| |
----------- |
----------- |
----------- |
----------- |
----------- |
| Production Cost |
$120,000 |
$3,750 |
$33,750 |
$26,250 |
$56,250 |
| Less Ending inventory |
16,125 |
375* |
6,750 |
5,250 |
3,750 |
| |
----------- |
----------- |
---------- |
---------- |
---------- |
| Cost of Goods Sold |
$103,875 |
$3,375 |
$27,000 |
$21,000 |
$52,5000 |
| |
|
|
|
|
|
| Gross Profit |
$34,625 |
$1,125 |
$9,000 |
$7,000 |
$17,500 |
| |
====== |
====== |
====== |
====== |
====== |
| Gross Profit Percentage |
25% |
25% |
25% |
25% |
25% |
|
*$3,750
production cost ÷ 20,000 units produced = $0.1875; $0.1875 × 2000
units in ending inventory = $375 |
|
Consideration of Cost After Split-Off Point:
Products not stable in their stage of completion
at the
split-off point and therefore without any market value require
additional processing to place them in marketable condition. In such cases,
the basis for allocation of the joint production cost is a hypothetical
market value at the
split-off point. To illustrate the procedure, the
assumptions listed below are added to the preceding example:
| Product |
Ultimate Market
Value per Unit |
Processing Cost
After Split-Off |
| A |
$0.50 |
$2,000 |
| B |
$5.00 |
$10,000 |
| C |
$4.50 |
$10,000 |
| D |
$8.00 |
$28,000 |
|
To arrive at the basis of the apportionment, it
is necessary to use a working back procedure whereby the after split-off
processing cost is subtracted from the ultimate sales value to find a
hypothetical market value. The following illustration indicates the steps to
be taken.
| Product |
Ultimate Market
Value Per Unit |
Units Produced |
Ultimate Market
Value |
Processing Cost
After Split-Off |
Hypothetical Market
Value* |
Apportionment of
Joint Production Cost** |
Total Production
Cost |
Total Production
Cost Percentage*** |
| A |
$0.50 |
20,000 |
$10,000 |
$2,000 |
$8,000 |
$4,800 |
$6,800 |
68.00 |
| B |
$5.00 |
15,000 |
$75,000 |
$10,000 |
$65,000 |
$39,000 |
$49,000 |
65.30 |
| C |
$4.50 |
10,000 |
$45,000 |
$10,000 |
$35,000 |
$21,000 |
$31,00 |
68.80 |
| D |
$8.00 |
15,000 |
$120,000 |
$28,000 |
$92,000 |
$55,200 |
$83,200 |
69.30 |
| |
---------- |
---------- |
----------- |
----------- |
------------ |
------------ |
----------- |
--------- |
| Total |
|
|
$250,000 |
$50,000 |
$200,000 |
$120,000 |
$170,000 |
68.00 |
| |
|
|
====== |
====== |
====== |
======= |
====== |
====== |
| |
*At the split-off point |
| |
**Percentage to allocate joint
production cost (using the joint cost total determined) |
| |
Joint
production cost / Hypothetical market value = $120,000 / $200,000 =
0.60 = 60% |
| |
60%
Hypothetical market value = Apportionment of joint production cost |
| |
***The production cost percentage is
calculated by dividing total production cost by the ultimate market
value; e.g., $49,000 / $75,000 = 0.653 = 65% for product B, and
$170,000 / $250,000 = 0.68 = 68% for all products combined |
|
The following illustration uses the same number
of units sold as was used in the preceding illustration.
| |
Total |
A |
B |
C |
D |
| Sales-Units |
52,000 |
18,000 |
12,000 |
8,000 |
14,000 |
| Sales-Dollars |
$217,000 |
$9,000 |
$60,000 |
$36,000 |
$112,000 |
| |
---------- |
--------- |
--------- |
--------- |
--------- |
| Cost of Goods Sold: |
|
|
|
|
|
| Joint production cost |
$120,000 |
$4,8000 |
$39,000 |
$21,000 |
$55,200 |
| Further processing cost |
$50,000 |
$2,000 |
$10,000 |
$10,000 |
$28,000 |
| |
---------- |
---------- |
---------- |
---------- |
---------- |
| Total |
$170,000 |
$6,800 |
$49,000 |
$31,000 |
$83,200 |
| Less Ending inventory |
22,211 |
680* |
9795 |
6,192 |
5,544 |
| |
----------- |
---------- |
---------- |
----------- |
---------- |
| Cost of goods sold |
$147,789 |
$5,120 |
$39,205 |
$24,808 |
$77,656 |
| |
----------- |
----------- |
---------- |
---------- |
---------- |
| Gross profit |
$69,211 |
$2,880 |
$20,795 |
$11,192 |
$34,344 |
| |
======= |
====== |
====== |
======= |
====== |
| Gross profit percentage |
32% |
32% |
35% |
31% |
31% |
|
*6,800 production cost / 20,000 units produced = $0.34; $0.34
2,000 units in ending inventory = $600 |
|
Since the statement has often been made that
every
Joint product should be equally profitable, the following modification
of the sales value technique has been suggested. The overall gross profit
percentage (32%) is used to determine the gross profit for each product. The
gross profit is deducted from sales value to find the total cost, which is
reduced by each product's further processing cost to find the
joint cost
allocation for each product.
| |
Total |
A |
B |
C |
D |
| Ultimate sales value |
$250,000 |
$10,000 |
$75,000 |
$45,000 |
$120,000 |
| Less 32% gross profit |
80,000 |
3,200 |
24,000 |
14,400 |
38,400 |
| |
----------- |
----------- |
------------ |
----------- |
---------- |
| Total cost |
$17,000 |
$6,800 |
$51,000 |
$30,600 |
$81,600 |
| Further processing cost |
50,000 |
2,000 |
10,000 |
10,000 |
28,000 |
| |
----------- |
------------ |
----------- |
----------- |
---------- |
| Joint cost |
$120,000 |
$4,800 |
$41,000 |
$20,600 |
$53,600 |
|
If sales value, gross profit percentage, or
further processing costs are estimated, the balance labeled "joint cost"
would serve as the basis for allocating the actual cost to the four
products.
|
